Monday, July 29, 2013

The Revenue Power of Emerging Financial Services

With interest rates remaining low and traditional fee income impacted by recent government regulations, banks and credit unions are increasingly looking for new ways to make up the shortfall in revenues.

Despite continued pressure from consumers around 'fee anxiety' and our industry's habit of giving most services away for free, there are still opportunities to promote customer loyalty and generate new non-interest sources of income according to new research.

In the most comprehensive fee optimization study of its kind from Market Rates Insight, Inc. entitled, 'Growth and Revenue Potential of Emerging Financial Services', the importance and value of new financial services are evaluated to determine new revenue sources as well as ways to attract and retain customers. In the study, it was found that there is a willingness from consumers to accept 'value-added fees' for services that are viewed as valuable.

"For the foreseeable future, deposit rates will remain flat and loan demand will be soft, so financial institutions will need to rely on fee revenues for income growth," states Dan Geller, EVP of research at Market Rates Insight. "To convert services from 'free' to 'fee', banks and credit unions will have to identify new services that consumers want and are willing to pay for. The study shows organizations how to use service fees to expand profits and penetration with both new and existing customers."

The 150-page study (available here) examines 13 emerging financial services and includes a competitive survey of 10 financial institutions, assessing the importance and value of each service, segmenting banks and credit unions as well as demographic segments for variances. The highlights of the study include:

      • Financial institutions can sell four times the number of financial services they currently do by offering more 'leading edge' services consumers find valuable
      • Only 13.1 percent of consumers receive emerging financial services from their financial institution, yet 54.6 percent of consumers who don't have these services find them important
      • The highest potential from growth in revenue from emerging services is with larger organizations
      • The highest ranking services in terms of potential growth are credit score reporting (71.4%), identity theft alerts (70.8%), payment protection services (64.6%) and same-day bill pay (58.7%).
      • The value placed on emerging financial services is inversely correlated to the age segment of consumers, with younger consumers placing higher values on the new services evaluated
      • Consumers value and will pay a premium for specific bundles of services more than they value individual services, but there is a point of diminishing return for the revenue potential of bundles relative to the expense of additional services
      • The mid-range revenue potential for an optimal bundle of emerging services is $10.12 per month.

Growth Potential

The study found that financial institutions are underutilizing the potential for selling emerging financial services to consumers regardless of the institution size or type or consumer demographic segment. Overall, only 13.1 percent of consumers were found to use any of the emerging services reviewed, while 54.6 percent of the consumers surveyed indicated that they would be willing to pay a monthly fee for the service(s). 

While there is significant potential for growth with all sized organizations, the potential was correlated to the size of organization, with larger institutions having a greater opportunity than regional banks, credit unions or smaller financial institutions.

As can be seen from the chart below, there is significant variability between the current use and potential demand for emerging financial services. As could be expected, the use of overdraft protection was currently the highest (42.9%), followed by low balance alerts (23.3%). Interestingly, identity theft protection was the most popular emerging financial service, with 91.9 percent of households desiring this service overall, followed by overdraft services (86.3%) and low balance alerts (80%).

Services with the greatest growth potential in the future include credit score reporting (71.4%), identity theft alerts (70.8%), payment protection services (64.6%) and same-day bill payment (58.7%). In fact, virtually all of the services analyzed had significant upside potential.

"These findings are significant because they come at a time when banks and credit unions are experiencing a decline in fees on traditional services such as NSF and interchange fees due to new regulations and greater scrutiny by the CFPB," states Geller.

Importance and Value of Emerging Financial Services

The level of importance consumers place on various services has a strong and positive correlation to the perceived value of the services. Based on the findings in the report, the services desired supported three major functions in our evolving lifestyle:
      1. Concern for digital identity and security: reflected by identity theft alerts and credit score reporting services
      2. Increased mobility: reflected by mobile deposit and bill pay services
      3. Desire for Efficiency: reflected by the desire for same-day bill pay, person-to-person payments, payment protection and overdraft services 
By evaluating the level of desire for these services and testing different pricing points, banks and credit unions can develop an escalation model of service features. In other words, higher fees can be charged for a premium level of service (same day mobile deposit) with a lower fee charged for a slower level of service.

In the report from Market Rates Insight, each of the 13 emerging financial services were evaluated with regards to level of importance from consumers not already owning the service, with a dollar value placed on each level of importance. An average level of importance and average value was also assigned. Digging even deeper, the report also analyzed each of the 13 services with regard to type/size of institution.

Mobile Deposits

As an example, 46 percent of the consumers who do not currently use mobile deposit services find this service important to some degree, ranging from slightly important (17.5%) to extremely important (3.5%). Based on the study, the average value consumers place on this service is $2.63, with the value jumping to $5.60 for the consumers who find mobile deposit extremely important. The potential is higher for larger institutions, with customers of smaller organizations willing to pay a bit less. 

Mobile Deposit Distribution of Importance (all institutions)

Mobile Deposit Distribution of Value (all institutions)

This analysis is consistent with a separate mobile banking study conducted by ath Power Consulting where it was found that one in three consumers would be willing to pay for some mobile banking services. Remote deposit capture was the most sought after mobile banking feature according to the study.

"Retail customers are becoming less resistant to monthly fees for mobile, with a third saying they would be willing to pay for mobile banking," said Michael McEvoy, ath managing director. That is up from the one in five during last year's study, he said. 

Despite this demand and value placed on the service, banks and credit unions remain reluctant to charge for mobile deposits. While a few banks and credit unions are testing the waters like U.S. Bank and Regions Bank, all are charging substantially less than the price customers are willing to pay according to the research.

Beyond the revenue potential for remote deposit capture, institutions can save operating overhead as well. According to a new report from Javelin Strategy and Research, financial institutions can save $50 for every customer encouraged to use mobile deposits. Javelin estimates that it costs about $4.25 for each deposit made in person in a branch. The same transaction costs $0.10 when done using a remote deposit capture application.

Identity Theft Alerts

Another example of significant revenue potential is with identity theft alerts. Consistent with many recent mobile banking findings around concern for security and desire for more mobile alerts, the potential for generating additional fee income with identity theft alerts (as well as low balance alerts) should not be ignored.

As shown below, 40.8 percent of customers find the offering of identity theft alerts either 'very important' or 'extremely important'. Not only is the distribution of importance skewed positive, but so is the value placed on this emerging service. While those who do not find the service as attractive are willing to pay more for the service, the average monthly value placed on the service is still $2.71.

Identity Theft Alerts Distribution of Importance (all institutions)

IdentityTheft Alert Distribution of Value (all institutions)

In the MRI report, all 13 emerging services are analyzed the same as above for all institution sizes as well as for each financial institution type, providing a way for bank marketers and product managers to compare results for like institutions.

Demographic Perspectives on Emerging Financial Services

The overall average importance of each of the 13 emerging financial services analyzed is relatively similar when viewed based on gender. There are some differences, however, with females finding mobile deposit capture more important than males (72.8% vs. 65%) and male consumers finding prepaid loadable cards more important.

While the differences in importance of emerging financial services is close to identical from a gender perspective, there is a substantial difference in the value that each gender places on these services. In fact, males placed an average value ($4.16) that was close to twice that of their female counterparts ($2.44). 

From a demographic perspective, the MRI study found that the more mature the consumer, the lower the value placed on most emerging financial services. Possibly reflecting the need for more guidance in financial affairs, the younger demographic segments placed a very high value on security, credit reporting and identity theft services, while the Gen Y and Gen X consumer also placed a high value on eldercare services, possibly reflecting the need to care for elder family members.

Finally, as could be expected, there were significant differences in the importance and value of emerging financial services when viewed from an income perspective. 

Revenue Optimization of Emerging Financial Services

As opposed to offering each of these services as part of a menu of individual options a customer can select from, Market Rates Insight found that the bundling of multiple services into logical combinations increased the value potential for banks and credit unions. Obviously, there are many different combinations of services possible, but MRI found that the principle of diminishing returns applies to the bundling of financial services.

Dan Geller states, "The principle of diminishing returns states that demand for services is curved and that any additional consumption beyond the highest point in the curve produces less return. In the case of financial services, the recurring monthly fee consumers are willing to pay for a bundle of services usually begins to diminish after an average of about three combined services."

Interestingly, the optimal point of fee revenue typically occurred before the highest fee-revenue point on the curve.

As a point of illustration, one of the 26 bundles developed by MRI provided the highest fee revenue when low balance alerts, identity theft services, mobile photo bill payment, location-based couponing, eldercare services and payment protection were combined for a total monthly fee of $10.20. 

However, the optimal fee-revenue occurs after bundling only the first three services - low balance alerts, identity theft services and mobile bill payment - for an optimal monthly fee of $8.68. The incremental fee revenue beyond this point begins to diminish significantly, without enough revenue to cover the cost of providing the additional services.

Overall Monthly Fee Income From Bundled Service Package #26
Incremental and Optimal Fee Income From Bundled Service Package #26

Another argument in support of optimizing the service bundle combinations is that many consumers are willing to pay a higher overall monthly fee for the optimal bundle than they would for each service separately. 

For instance, in the above case, study respondents indicated they would pay an average of $2.71 for identity theft services, $2.53 for mobile photo bill pay and $2.43 for low balance alerts. The total fee for these services would be $7.67 individually, while the consumer would pay $8.68 for the optimized bundle - a premium of $1.01 or 13%.

The study provides strong support for the logic of service fee optimization. Twenty-six bundles are featured in the study, with each bundle consisting of an average of three services for an average fee revenue potential of $10.12 per month. When you take into account another finding in the study that 68% of consumers desire these services, an institution can generate an average of about $120 annually in recurring fees from two-thirds of its customer base.

Mission for Financial Marketers and Product Managers

As an industry, we have gotten gun shy around fees due to consumer backlash regarding checking account fees and related services over the past several years. MRI studied bundling this year because in 2012 they found that FIs were giving away too many services for free. According to Rick Barham, CEO and founder of Market Rates Insight, "Our experience told us that it’s very difficult to go from “free to fee” without adding value, and we believed that the best way make this leap was via bundling “free” with other services. Our Study indicates our assumptions were right, and consumers do place importance and value on bundles that support their lifestyles."

This timely study from MRI shows that banks and credit unions no longer need to cower when trying to increase non-interest income. In fact, there are many emerging financial services consumers are willing to pay for either individually or when associated with service bundles.

Conservatively speaking, the study illustrates that institutions who focus on providing valuable services to consumers can generate as much as $10 per month from up to two thirds of the customer base. The key is to use the study results to match data to individual customer segments and to place revenue generation high on the list of strategic priorities for 2013, 2014 and beyond.

Now is the time for financial marketers and product managers to work together to determine the best way to move away from being a utilitarian organization, offering all new services for free to a value focused organization that is willing to assess a fee for value added services.

Find Out More

There’s a lot more to the new 'Growth and Revenue Potential of Emerging Financial Services' study that can't be covered adequately in this blog such as the breakout of results by institution type, the 26 online optimization reports and the competitive analysis, which shows how top financial institutions are integrating these services. In total, there are more than 250 illustrations in the report with high levels of detail that would be valuable to financial marketers and product developers.

Feel free to access the report with the link below. The author of the report, Dan Geller, has also offered to answer questions from my readers about the report by email at

Additional Insights

Growth and Revenue Potential of Emerging Financial Services (Full Report) - Market Rates Insight (June 2013)

Integrated Study on Service Fees - Market Rates Insight (May 2012)

Mobile Deposits Boom Means More Money For Banks - Market Rates Insight Blog (July 2013)

The 2013 ath Power Mobile Banking Study - ath Power Consulting (June 2013)

Fee Revenue Optimization Analysis - Market Rates Insight (July 2013)

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